While Apple’s services now represent a significant portion of the company’s quarterly revenue, just behind iPhone sales, you might not realize that the lion’s share of that revenue comes from one of the biggest. big rivals of Apple.
Ironically, it’s Google that is Apple’s biggest customer, throwing billions of dollars at Apple every year for the privilege of being the default search engine on the iPhone and iPad, and now, a new analyst report suggests that rental costs for this important digital real estate could reach $ 15 billion by 2021.
After all, there are over a billion iPhones and iPads in use, and most people don’t think much about the search engine they use when they just open Safari and type something. thing, so it’s pretty easy to see how being the default search engine is easily worth billions of dollars for a business whose entire business relies on the kind of data coming from search queries.
Recent statistics suggest that Google is currently processing over 60,000 search queries per second, or over 5 billion search queries per day. That’s a lot of data, and it’s safe to say most of it comes to Google by default.
So, needless to say, it’s a pretty competitive landscape as well. Google may be the biggest search engine in town, but it’s far from the only one. devices.
In an investor note shared by Ped30, it looks like it’s this fear of competition that’s going to force Google to raise the stakes, offering Apple nearly $ 15 billion this year to make sure it stays on top.
We’ve noted in previous research that GOOG is likely paying to make sure Microsoft doesn’t overbid it.
Toni Sacconaghi, Bernstein
According to Bernstein analyst Toni Sacconaghi, Google’s estimated payments to Apple last year were around $ 10 billion, more than the initially estimated $ 8 billion, but just in the middle of the range in which the analysts had collectively fixed it. This updated estimate is based on information disclosed in Apple’s public records with the SEC and a “bottom-up analysis of Google’s TAC (Traffic Acquisition Costs).”
Sacconaghi adds that those numbers could reach $ 20 billion in 2022, and while he acknowledges the possibility of antitrust regulatory issues that could declare the search agreement between Apple and Google illegal, he suggests that it is “likely in years”.
Apple’s complicated “services” category
However, what’s most important here is how much of Apple’s profit comes directly from this search deal with Google.
According to Sacconaghi, if Google actually pays the $ 15 billion planned for this fiscal year, that would represent 9% of Apple’s gross profits. That means nearly a tenth of Apple’s profits come from a deal with one of its biggest tech rivals.
To be fair, however, these types of agreements go both ways. As we saw a few weeks ago, Apple is also paying Google around $ 300 million a year to rent space for iCloud data on its servers. Yet $ 300 million is only a tiny fraction of $ 15 billion.
The size of the Google search deal puts Apple’s service revenue in a very different light than most people realize. When most of the users think of Apple’s services, they think of consumer-oriented services like Apple Music, Apple TV +, Apple Arcade, Apple Fitness +, etc. However, these outbound services are actually only a tiny fraction of the $ 17.5 billion Apple recorded in services revenue last quarter.
For example, if Sacconaghi’s numbers are correct, nearly 15% of Apple’s service revenue came directly from the Google search agreement in the last quarter, and this was even more significant in previous quarters.
Since Apple doesn’t break down its Services category, it’s hard to say exactly where the rest came from, but most analysts consider Apple’s 15-30% commission as the other. big chunk of the Services category, grossing around $ 20 billion a year. .
To be fair, that still means Apple’s consumer-facing services are increasing their revenue, but they aren’t as much revenue as you might think.
For example, in the first quarter of 2021 – Apple’s “vacation quarter” – services revenue was $ 15.8 billion. It jumped to $ 16.9 billion in the second quarter of 2021 and then to a record high of $ 17.5 billion in the recently ended third quarter. Considering that the money Apple makes from the Google Search Agreement and the App Store is likely to remain fairly static from quarter to quarter, it’s fair to say that most of that growth has come from Apple services.
However, there is still a lot more to this category than you might think. Apple Services include:
- Apple Music: With around 70 million paid subscribers paying between $ 9.99 and $ 14.99 / month, it’s fair to say that Apple Music accounts for the bulk of the revenue among the services that users can actually pay for directly.
- Apple TV +: With many users likely still enjoying Apple’s one-year free trial, the company may not be making too much money directly from its new video streaming service, but that doesn’t mean it doesn’t. not record this income in the Services column. To comply with generally accepted accounting principles (GAAP), Apple is actually required to deduct the cost of each free one-year Apple TV + subscription from its hardware sales revenue and record it as service revenue instead. to ensure that investors are not misled. .
- Apple Arcade: Apple hasn’t said much about the number of subscribers it has for its subscription gaming service, and Apple Arcade on its own is unlikely to contribute significantly to Apple’s bottom line.
- Apple News +: From all the reports, we imagine that Apple’s subscription news service revenue is probably little more than a rounding error in Apple’s income statements. It has struggled to gain traction and may not even have more than two million subscribers.
- Apple Fitness +: Having only launched last December, it’s hard to say at this time how much of a contribution Apple’s new Fitness + service is making to its bottom line, but the fact that the numbers continue to rise each quarter suggests that it is helping the market. less a little.
- ICloud storage: Apple still only gives 5GB of free iCloud storage, with an upgrade to a 50GB plan starting at $ 0.99 / month, while you can get 2TB for $ 9.99. Analysts estimate that around 20% of iCloud accounts are on one of the paid tiers, although it’s nearly impossible to know what the breakdown is. This one may also grow a bit with the new iCloud + features coming in iOS 15.
- Apple One: Apple last year bundled all of its services into a bundle of Apple One plans, providing great savings for users who wanted to subscribe to multiple services. While this may have attracted new users who helped increase Apple’s service revenue, it may also have cost users money who took advantage of the savings by bundling the services for which they were already paying separately.
- ITunes Sales: This includes the movies, TV shows, and music that the customer still purchases from the iTunes Store. With the resumption of streaming services, it’s fair to say that it’s probably a shadow of what it once was, but there are still some people who would rather own their content than rent it.
- Apple Books: As with the iTunes Store, books and audiobooks sold through Apple’s Books app are an often overlooked item in Apple’s service revenue.
- Apple Pay: Another category that’s easy to miss is the cut Apple takes from every transaction you make with Apple Pay. While Apple doesn’t charge users, merchants, or developers for using Apple Pay, it does get a small fraction of every transaction from the banks that issue the cards you use with Apple Pay. When Apple Pay launched in the US in 2014, that figure was 0.15%, or 15 cents for every $ 100 spent. It might not seem like much, but with over 2 billion Apple Pay transactions per year, it could be real money.
- AppleCare: Every AppleCare + plan you buy, whether it’s for your iPhone or HomePod mini, also counts as income in Apple’s Services category, and that’s likely increased significantly since Apple switched to a subscription model. monthly rather than requiring larger upfront payments. After all, it’s easier to pay $ 10 a month to cover your iPhone than $ 199 all at once – and unless you cancel it sooner, Apple makes a little more money that way, too.
- License fees: The Google Search Agreement is Apple’s biggest licensing deal by far, but it’s not the only one. For example, The Weather Channel pays Apple to get a large investment in iOS Time application, have outbid on Yahoo Weather a few years ago.
- Maps, Siri, free iCloud, iOS updates and more: Just like with the free one-year Apple TV + subscriptions, Apple also deducts the costs of many of its “free” services like Maps, Siri, iMessage and the 5GB of iCloud storage from its iPhone revenue and records them in its revenue. Services. to reflect the fact that users indirectly pay for these services as part of the purchase price of their iPhone. While Apple didn’t start doing this for most of its services until the first quarter of 2018, which resulted in a 7.7% increase in revenue in that quarter, it actually does so for the first quarter of 2018. iOS updates from the very beginning, at least for the iPhone.
While that last point might sound particularly odd, it’s basically the fact that Apple’s “free” services are included in the purchase price of your iPhone, iPad, or Mac. To avoid misleading investors, Apple should consider the added value of these services in their appropriate categories, which ultimately means that part of the purchase price of every iPhone you buy is declared. as “Services” income instead of “iPhone” income.
In fact, one of the best examples of how it works was when Apple charged minimal fees for software updates to the iPod touch. IPhone users got these same updates for free because Apple had set aside part of the purchase price of each iPhone to account for the “free” iOS updates it would offer during the life of the iPhone. product. This was not originally the case for the iPod touch, although it eventually fixed the problem by moving this device to the same accounting standards.